China’s
Belt and Road Initiative (BRI) is intended to catalyse the economies of
countries around the globe.
Yet BRI projects overlap some of the most ecologically fragile places on earth.
The multi-trillion-dollar initiative – to build transcontinental networks of
roads, railways and ports, studded with dams, mines, power plants, and solar
and wind farms – has its environmental impacts. These include air and water
pollution, soil contamination and erosion, habitat and wildlife loss.
For project developers and funders, failure to address these impacts can
translate into regulatory and reputational risks. So they need to take
mitigation seriously.
Risks confronting developers can include penalties, legal action and backlash
from communities causing project delays and even closures. According to a 2018 study, 14% of BRI projects in 66
countries have faced some kind of local pushback.
Problem projects
At the Myitsone dam in Myanmar, Chinese developers and investors faced the
worst-case scenario, locking in funds indefinitely after the dam was suspended
mid-construction on environmental grounds. Fishing communities feared the
project would jeopardise their livelihoods and obstruct fish migrating upstream
to spawning areas. The dam was shelved after sustained local and international
opposition, leaving China Power Investment Corporation (CPI) and the investor
China EXIM bank in limbo.
A dam in Indonesia’s Batang Toru rainforest funded by the Bank of China (BOC)
was also met with significant local and international opposition and litigation
as it threatened the only habitat of the rare and critically endangered Tapanuli
orangutan.
Cambodia’s proposed Sambor dam, dubbed an imminent environmental
disaster for the Mekong river, faces similar problems.
Pressures on state banks
Environmental risks can spill over to affect project financers. They may face
loan defaults or find themselves forced to withdraw funding where they have
failed to vet projects pre-emptively or to ensure risk management during
implementation. For example, unrelenting opposition from environmentalists
forced BOC to re-evaluate its funding to the Batang Toru dam last year.
Six Chinese state-owned banks (CDB, CHEXIM, BOC, ICBC, ABC, CCB) have reportedly provided more than 90% of BRI’s
financing, which puts them at disproportionate financial risk from BRI’s
environmental impacts.
A further
problem is that many BRI projects have a weak business case and are being implemented in some
of the world’s most challenging governance regimes. China continues to
state-sponsor projects that have failed to attract private investors. The
underlying hope, according to Minyuan Zhao, associate professor of management
at Wharton, University of Pennsylvania, is that the overall connectivity and
trade boost that BRI brings will make it commercially profitable in
the aggregate. This
strategy may backfire since China’s public banks are already struggling with non-performing loans. The bad debt problem is likely to
worsen, with many flagship BRI projects hitting roadblocks, several of them through
environmental mismanagement.
There is a clear case for the BRI’s financers to put in place robust
risk-management frameworks incorporating environmental safeguards – something
that multilateral development banks (MDBs) such as the World Bank have
developed in response to similar risks.
Decades of experience in implementing these safeguards have helped the MDBs
evolve good practice in environmental impact assessment and mitigation. For
instance, the International Finance Corporation’s Performance Standards require
clients to have mitigation plans that ensure net gains in biodiversity where
critical habitat is impacted by a project.
Positive signs
China’s regulators and policymakers are now paying greater attention to the
environmental aspects of risk management. For instance, in Article 21 of its
2012 Green Credit Guidelines the Chinese Banking Regulatory
Commission (CBRC) has called on China’s banks to ensure their clients align
with international good practice when operating overseas. Hopefully, such guidelines
will generate more impetus for BRI financers to take environmental impacts
seriously within their risk-management policies.
China’s banks are also increasingly co-funding projects alongside MDBs in an
apparent bid to mitigate reputational risks. However, such partnerships need to
go deeper with more rigorous application of MDB risk-management frameworks.
While most MDBs boast the highest credit ratings from international
credit-rating agencies, indicating a high capacity to meet financial commitments,
most Chinese banks have much lower ratings. Robust risk-management frameworks
can go a long way in strengthening the credit profiles of Chinese banks.
Moreover, explicit and binding environmental safeguards will ensure greater
debt sustainability for BRI projects. This will help leverage private and
international financing for the BRI which has hitherto remained low.
From our partner chinadialogue.net
